5 High-Yield Fiscal Cliff Bargains

First, the bad news: We’re not likely to see a fiscal compromise from Congress until the very end of the year. The good news? Given the uncertainty, dividend stocks that are already out of favor are turning into bargains.

Many investors are sitting on hefty losses on such equities. Fearing higher taxes on investment income, they’ve started year-end tax selling.

But this is exactly when you should be looking to buy.

Below are five out-of-favor but well-established companies with high dividends. As the Federal Reserve continues its ultra-low interest rate policy, these equities provide substantially higher income than bonds. And all of them have growth prospects should the economy veer away from the fiscal cliff, which we think is likely.

Stocking Stuffers

Pitney Bowes (NYSE: PBI): 13.6 percent yield; price $11.19.

Pitney faces two major headwinds: relatively high debt ($3.7 billion in debt vs. $124 million in equity); and a shrinking market. Pitney is by far the largest US provider of mail products, from postage meters to software and printing services.

Recently, Pitney stock had a price-to-earnings (P/E) ratio of less than 4. The stock nosedived in November, after the company reported lower-than-expected third-quarter earnings of $0.38 cents a share.

Overall, however, Pitney’s fundamentals seem solid. S&P recently reaffirmed the company’s credit rating of BBB, still in the investment-grade camp. Although close to a third of Pitney’s debt matures in the next three years, the company has the wherewithal to refinance at lower rates or to retire the debt.

Pitney’s junk mail business (direct-mail marketing) has held up relatively well, and it’s slowly expanding into new markets. For the September 2012 quarter, operating earnings were around $805 million, with a profit margin of 15 percent.

Pitney raised its dividend a year ago, and has maintained it since. Given good cash flow and a 50 percent payout ratio, the dividend appears safe for now.

Windstream Corporation (NASDQ: WIN): 12 percent yield; price: $8.38.

Windstream provides broadband, voice, and video services in rural areas that the telecom giants do not cover. Although mobile wireless poses stiff competition, fixed-wireless services such as those provided by Windstream are considerably less expensive for high-bandwidth users.

Windstream has maintained its $0.25 quarterly dividend since December 2006. Cash flow is good, revenue is holding steady, and gross profit margins are over 50 percent. But high debt and a 400 percent payout ratio (high, even for telecoms) are cautionary flags.

Windstream’s rivals have cut their dividends due to declining revenue and high debt. But Windstream’s revenue, even excluding acquisitions, is steady. New broadband revenue has been offsetting the steady loss of traditional voice customers (now down to 30 percent of sales).

Meanwhile, Windstream’s moderate capital spending in 2013 should assure both ample dividend coverage and a chance to pay down debt.

A bullish indicator: When the stock price fell to the $8.20 range in early November, CEO and President Jeff Gardner along with other insiders snapped up more than $200,000 worth of the shares.

TICC Capital (NASDQ: TICC): 11.9 percent yield; price: $10.02.

A Business Development Corporation (BDC), TICC raises money mostly through debt offerings and lends it to early-stage tech companies. It also invests in syndicated corporate loans, known as collateralized loan obligations (CLOs).

This sort of lending is profitable but risky, especially if US interest rates rise and the global economy slips into recession. We think each of these scenarios is unlikely in the coming year.

Petrobakken is a little known, $2-billion-a-year oil company with a major presence in western Canada (the Bakken and Cardium formations), and proven management.

The big increase in mid-continent oil production since 2009 has outpaced pipeline infrastructure, so Petrobakken and its Canadian cohorts have been selling their oil below the prevalent US price, which is based on WTI (West Texas Intermediate crude). As pipeline infrastructure gets built—and this is starting to happen now—the discount should disappear.

Petrobakken has relatively high costs for “FD&A” (Finding, Developing and Acquiring), of around $37 a barrel. But these are expected to drop in the next several years as production in Cardium picks up.

Production and reserves have grown steadily over the last few years, generating ample cash flow to support the monthly dividend of $.08 cents per share ($0.96 a share annually).

In August 2012, S&P increased Petrobakken’s corporate debt rating to B “Positive” from B “Stable” (both less than investment-grade), and indicated a credit upgrade is likely if the company continues on its current trajectory. The company’s unsecured debt is rated CCC+.

Indianapolis-based Calumet is a Master Limited Partnership (MLP) whose refineries convert crude oil and feed stocks into lubricants, waxes and solvents used in some 1,500 different products, from cosmetics to aviation.

Calumet has been growing through acquisitions that help boost cash flow while expanding the business and profit margins. Most recently, Calumet bought a small Montana refinery for $120 million. The deal, set to close by the end of 2012, will add almost 10,000 barrels a day to capacity.

The acquisition of a major refinery from Murphy Oil last year increased capacity by 50 percent. In fact, growth over the past several years has helped generate a 24 percent jump in the distribution rate. And Calumet has increased its payout in each of the last four quarters.

Calumet’s payout ratio is 64 percent, and the company generates ample cash flow to support the dividend. You can uncover 6 more high-yield MLPs in this free MLP Investments report.

This article by Bruce Vanderveen was originally published on Investing Daily.

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